A Baby Bell Primed for the Big Fight

IT looks like any other brick colonial home in this Washington suburb. But for Raymond W. Smith, chairman and chief executive of the Bell Atlantic Corporation, it is both a dream house and a castle to be defended.

Linked to the outside world by optical fibers, the unoccupied house was built recently by Bell Atlantic to show how a telephone company can deliver far more than talk.

In the kitchen, a person can point a clicker at a television screen to browse the specials at a local grocery store, order the week's food and specify a delivery time. In the family room, the television is wired to instantly retrieve movies from a remote electronic library. Upstairs, children can order video games or study topics like the Civil War by calling up documentaries.

Stripped to its essence, however, Mr. Smith's dream house is nothing less than a staging area in a multibillion-dollar battle to determine which companies will provide the next generation of communications for the American home. At stake is what Bell Atlantic and the nation's other local telephone companies see as their Holy Grail: an all-purpose network that will deliver a flood of new services and produce a flood of new revenues.

But for the first time in their history, the phone companies face tough competition and big risks, and their identities will be shaped by how they respond. Even though no one knows how badly customers will want this communications cornucopia, a convergence of technologies is driving cable television companies and other rivals to provide the same kind of highway to the home. The danger for the phone companies is that they will be left behind.

"They don't want to let the next stage of business growth pass them by," said Peter D. Shapiro, a senior consultant in telecommunications at Arthur D. Little Inc. in Cambridge, Mass. "It is more an aggressive move than a defensive move, but if they don't do it, they fear that the major cable suppliers will get in there and lock them out."

But if any company can hold its own in this high-tech, high-stakes free-for-all it is Bell Atlantic, one of the seven regional "Baby Bells" that emerged from the 1984 breakup of the American Telephone & Telegraph Company. Going Head to Head

Perhaps more than any of its siblings, Bell Atlantic under Mr. Smith has moved to meet competitors head on. Based in Philadelphia and operating from New Jersey through Virginia, it has upgraded its networks at a furious pace, rolled out dozens of new services -- like Caller ID and improved data communications to the home -- and begun a headlong plunge into the video marketplace. That includes big plans to make available to every home in New Jersey the same kinds of services available in its showcase house here.

"We will be a full-service company," Mr. Smith said in a recent interview. "We have three information instruments in the home -- the telephone, the television and the computer -- and they are all coming together to communicate on a full-service network. The time is not far off when you will be answering your television set and watching your telephone."

Just who will be transmitting the answers and images is far from clear, however. Indeed, the battle is part of a larger debate over efforts by the Clinton Administration to develop a nationwide "information superhighway." The Government is already financing a high-speed network that would link supercomputers, but it is also trying to make the highway accessible to the public. Vice President Gore has long argued that the phone companies should play a big role and he supports removing a key obstacle in their way: a Federal law that bars them from owning cable television systems in their areas.

The cable companies already operate networks that deliver dozens of television channels into more than 60 percent of the country's homes. Now they are boosting that capacity more than 10-fold, and are introducing so-called switching technology to offer two-way communications.

The cable companies are also making a big push into wireless "personal communication services" -- low-powered, inexpensive pocket phones and hand-held computers that communicate over the air. These services are expected to be authorized by the Government within two years.

Still other rivals are on the horizon. Long-distance companies are edging back into the local market by teaming up with cellular phone companies, as in the pending alliance between A.T.& T. and McCaw Cellular Communications, and many experts predict similar alliances with cable companies. And the cable companies have acquired many of the growing number of new fiber-optic carriers, which provide high-speed local communications services for big corporate customers.

Finally, local phone companies are beginning to turn on each other. Just two weeks ago, the Southwestern Bell Corporation said it would pay $650 million for two cable franchises outside Washington, in Bell Atlantic's backyard. Because Southwestern already owns a cellular telephone franchise in the Washington area, the deal immediately raised the specter that Southwestern would raid Bell Atlantic's territory by setting up a hybrid cable-telephone operation.

Bell Atlantic is hardly running scared. Under the 54-year-old Mr. Smith, who has been head of the company for four years, Bell Atlantic has been spending about $1.5 billion a year on high-capacity fiber optics and advanced switching technology. It is also investing heavily to link wireless communications to its regular phone network.

Alone among the Bells, it has committed itself to deploying a new digital compression technology that allows customers to receive television pictures over ordinary phone lines. Over the next two years, long before most neighborhoods have been re-wired with optical fiber, the company hopes to offer what amounts to an electronic video store. Teams and Lawsuits

And, by both confrontation and collaboration, it has begun a broad effort to compete directly with the cable industry. It recently announced that it will spend an extra $1.5 billion to run fiber optic lines to every neighborhood in New Jersey by 2010. In the last few months, it has teamed up with other companies in New Jersey to deliver cable TV programming over modernized phone lines in Morris County and Dover Township.

And in Virginia, Bell Atlantic recently filed a lawsuit seeking to overturn the Federal prohibition against cable ownership. In that suit, the company said it wants to build a fiber optic system in Alexandria that will offer hundreds of channels and two-way communications for every home.

"They are attempting to seize their own destiny, at a time when they're under siege just the way A.T.& T. was under siege before the breakup," said Janice Obuchowski, who was head of the National Telecommunications and Information Administration under President Bush.

But others are skeptical. Some say cable companies have fundamental long-term advantages in the video marketplace, and that telephone technology is not yet up to par. Others think Bell Atlantic and some of its siblings are being fuzzy and too grandiose in their attempt to be all things to all people.

"My basic criticism of all seven regional Bell companies is none of them have really prioritized a long-term future," said Victor Schnee, president of Probe Research, a telecommunications consulting firm in Cedar Knolls, N.J. "They've got all their tentacles out, but they're so big and so sprawling that it's hard for them to come up with a succinct game plan." Sizing Them Up

Nonetheless, the Baby Bells are looking at the future in different ways. The Nynex Corporation, parent of New York Telephone, has been very reluctant to push into television services because its executives say they face too many regulatory burdens. Pacific Telesis, parent of Pacific Bell, is spinning off its high-growth, unregulated wireless business. And Southwestern Bell appears to be hedging its bets by modernizing its own network more slowly than some of its siblings while also buying outside companies.

Notwithstanding their strategic differences, the phone companies as a group offer some stark strengths and weaknesses when compared with the cable companies.

With combined annual revenues of $100 billion and enviably steady profits, the phone companies dwarf the $20 billion cable industry. And because cable companies have borrowed to the hilt to finance their growth, they have far less financial leverage than the phone industry.

Bell Atlantic, which serves one of the most densely populated and affluent regions of the country, is particularly well poised. Despite the slow economy, its earnings jumped 7.6 percent in 1992 to $1.3 billion, on revenues of $12.1 billion.

The phone companies also bring to the table powerful switching networks that can route millions of calls at a time and instantly link customers over a patchwork of independent long-distance carriers and wireless services if necessary. But the phone industry's Achilles' heel is the last mile of copper wire that reaches to individual homes and businesses and was installed for the simple purpose of handling ordinary phone calls. One-Way Line

By contrast, the cable industry has been more aggressive about employing new technology, wiring initially with coaxial cable rather than thin copper wires. By adding fiber optics to their main arteries, or "trunk lines," and by using new digital compression technologies, the cable companies are now gearing up to offer hundreds of channels. Cable systems have their own weakness: they were originally built only for one-way service to the home. But by adding switching technology, many systems hope to offer a free-wheeling mix of video entertainment, phone service and two-way data communications.

Tele-Communications Inc. of Denver, the nation's biggest cable company, recently announced plans to introduce technology that would give systems as many as 500 channels. Last month, Time Warner Inc. announced it was building a system in Orlando, Fla., to provide video on demand as well as two-way communications.

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Indeed, some experts argue that the cable industry may have a big short-term cost advantage.

Bruce L. Egan, a research fellow at Columbia University's Institute for Tele-Information, recently estimated the amount of money needed by the cable and the telephone industries to upgrade their services.

To reach the modest goal of supplying both conventional cable television and ordinary phone service over the same line, telephone companies would have to spend about $1,500 per customer while cable firms could spend just $300, Mr. Egan said.

Building the most advanced system -- high-speed, two-way communications for both video and data -- could cost the same amount for each side, $1,500 or so per line.

Cable's "advantage is in the short run," said Mr. Egan. "But the short run may be what really matters." A New Weapon

Bell Atlantic executives question comparisons like this one, saying that the costs of new technology will almost certainly come down as modernization accelerates. Meanwhile, hoping to short-circuit the cable industry, the company is now rolling out an innovative interim technology called Asymmetrical Digital Subscriber Line, or A.D.S.L. Developed by Bellcore, a research consortium owned by the seven Bell companies, A.D.S.L. makes it possible for the first time to send TV images as good as those from a videocassette recorder over an ordinary copper wire.

The new technology can only send a single channel of television at one time. But the allure is that customers could eventually have a virtually limitless number of choices, because the telephone switching network would allow people to order up the programs from a huge computerized jukebox. As envisioned, customers could dial up not only the phone company's jukebox but those of other information providers.

"This battle will be fought in two dimensions," said Stuart C. Johnson, president of Bell Atlantic regional services. "One is convenience and the other is variety. Five hundred channels is still a broadcast technology. Our concept is to provide switched architecture, which will give our customers infinite variety."

But experts emphasize that the technology still has big limitations. Couch potatoes won't be able to flip through different channels, for example, because the system takes as long as five minutes to cue up a program.

An even bigger drawback is that the system can't transmit live programs, which rules out offering news or sport events. The problem is that the system must compress the video into a comparatively small stream of digital data, a process that takes time and must be done in advance.

Bell Atlantic executives say this is only a temporary hitch and that equipment available within two years will quadruple the amount of data that can be sent and enable them to handle live programming.

But others are skeptical about both the technology and the economics. "The basic business case isn't there," said Jerome Lucas, president of Tele-Strategies Inc., a consulting firm in McLean, Va. "The technology is too expensive to get costs down to the level of video rental stores," he argued, adding that cable companies can pull off similar feats at lower costs.

Meanwhile, Bell Atlantic has been pressing toward the ultimate solution: running optical fibers, which can carry almost unlimited amounts of information, into every neighborhood, as it hopes to do in New Jersey.

Bell Atlantic executives and many analysts say the most logical path is to team up with cable companies. But that may prove difficult. Mr. Shapiro, of Arthur D. Little, noted that cable companies now collaborate with each other on many fronts, especially in producing popular programs, and many may be reluctant to raid each other's markets with help from a telephone company. And many cable companies seem bent on upgrading their own networks rather than leasing lines from the phone industry.

Others contend that the public would be better off with fewer mergers of telephone and cable systems.

"There are a lot of people in both the telephone and the cable industries who think that one wire to the home is enough," said Philip J. Sirlin, vice president of Strategic Systems Group in Woodbury, Conn. "I'm not convinced of that."

"They're going to find out it's very difficult to move into our territory, if we have anything to say about it," he said. A BELL ATLANTIC SITCOM

FOR most of this century, telephone companies did not have to sell anything. They were monopoly utilities, supplying a necessity of modern life.

But now the phone companies are trying to sell a growing list of frills, from Caller ID to a feature that blocks calls from particular numbers, and even the most hokey sales gimmicks are getting a try.

In the past year, the Bell Atlantic Corporation has used door-to-door salespeople from Amway; set up shop in Kmart stores; was part of a direct-mail effort with Domino's Pizza and touted its services as a long-term "headache remedy" in envelopes containing Tylenol tablets.

But all that is timid compared with "The Ringers," the world's first 30-minute television "infomercial" written as a situation comedy. The show chronicles the misadventures of what Bell Atlantic calls America's "funniest, phoniest" family.

Something of a blend between "Father Knows Best" and "Roseanne," the show features Ralph Ringer, a plumber, and his wife, Rhonda, and their two children, whose names also begin with an "R." Hilarity ensues when teen-age daughter Rachel gets tangled in boy problems, only to be rescued by new phone features like call-waiting. A toll-free number flashes at the end, so viewers can order services on the spot.

The infomercial was broadcast in November in Baltimore and company officials say the results were encouraging. More episodes will be produced this year for broadcast elsewhere in the company's service area. A SHORT-TERM SOLUTION

WHILE it will take decades and billions of dollars to build a high-speed fiber optic highway that links every home and business, Bell Atlantic has been the most aggressive of the seven Bell companies in offering a low-cost interim technology that dramatically boosts the power of ordinary phone lines.

Called the Integrated Services Digital Network, or I.S.D.N., the technology makes it possible to simultaneously send voice, video images and computer data over a conventional phone line. I.S.D.N. transforms all information into the ones and zeroes of computer code and speeds up data transmission by nearly 15-fold over today's fastest modems.

Using I.S.D.N., people in different locations can collaborate on a writing project, with each watching the work progress on a separate computer screen. And doctors can exchange high-resolution color images of a patient's body in less than a minute.

The appeal of I.S.D.N. is that it can be within the price-range of individuals and small businesses, but the phone companies vary widely in how fast they are making it available and how much they charge.

Bell Atlantic plans to offer I.S.D.N. on 87 percent of its lines by the end of 1994, the fastest deployment of any regional phone company. Convinced that widespread adoption will jumpstart the market for lucrative information services over phone lines, the company is charging a flat rate of $28 a month for each line -- a modest premium over regular phone service.

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A version of this article appears in print on February 21, 1993, on Page 3003001 of the National edition with the headline: A Baby Bell Primed for the Big Fight. Order Reprints|Today's Paper|Subscribe